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GSV Capital Corp. (NASDAQ:GSVC)

Q3 2012 Earnings Call

November 7, 2012, 8:30 a.m. ET

Executives

Alex Wellins - Blueshirt Group, Investor Relations

Michael Moe - Founder & CEO

Stephen Bard - CFO

Analysts

Ed Woo - Ascendiant Capital

Mohammad Sheikh – B Finance

Darnell Elliot – Private Investor

Brett Rice – Janney Montgomery Scott

Mohammad Sheikh – B Finance

Operator

Good day, ladies and gentlemen, and thank you for standing by. Welcome to the GSV Capital third quarter 2012 earnings conference call. (Operator Instructions).

I would now like to turn the conference over to Alex Wellins. Please go ahead.

Alex Wellins - Blueshirt Group, Investor Relations

Thank you for calling – joining us on today's call. I'm joined today by Michael Moe, CSV's Founder and CEO, and Steve Bard, the company's Chief Financial Officer.

Today's call and webcast are being recorded. An audio replay of the conference call will be available for seven days. This conference call is being webcast on our website at www.gsvcap.com. Replay information is included in our press release that was released before the market opened today. Please note that this call of the properties of GSV Capital Corp. and the unauthorized rebroadcast of this call in any form is strictly prohibited.

I'd also like to call your attention to the customary disclosure in our press release today regarding forward-looking information. Statements made in today's conference call and webcast may constitute forward-looking statements, which relate to future events or our future performance or financial condition. These statements are not guarantees of our future performance, condition, or results and involve a number of risks and uncertainties. Actual results may differ materially from those in the forward-looking statements as a result of a number of factors including those described from time to time in our filings with the SEC. We do not undertake – update our forward-looking statements unless required to do so by law. To obtain copies of our latest SEC filings, please visit our website at GSVcap.com.

With that said, I'll turn the call over to Michael Moe. Michael?

Michael Moe – Founder, CEO

Thanks, Alex. Good morning.

I'm going to start out by saying that our thoughts and our prayers are with those impacted by the terrible hurricane that hit the East Coast last week.

I'll note I was supposed to present at the Piper Jaffray conference later today. However, that conference has been cancelled due to the storm.

Moving onto GSV's third quarter results, GSV continued to execute on the strategy that we’ve laid out for investors over the past 18 months. We've been able to continue to build on our high-growth portfolio to 45 names and continue to add to core positions. These are key venture-backed companies across our five focus areas of investment.

Despite recent stock market gyrations, especially relative to Facebook on the social media stocks, you know, we have very high confidence that we have a portfolio of very high growth, very strong fundamental, long-term investments that will play out over time. We continue to believe that many of these companies in our portfolio are game-changing companies, one-of-a-kind businesses led by top management teams that we have a high degree of confidence, we'll execute against their opportunity and drive outsized growth and significant shareholder value in the years ahead.

I'm going to start out with a quick review or our state of the portfolio as of September 30th, 2012. The total value of GSV's portfolio investments was $217.4 million. The net asset value of the fund was $13.45 per share. And we entered the quarter with $42 million in cash and money market funds.

As of September 30th, 2012, some of the largest positions of the portfolio are Twitter, where we've invested $33 million representing 13.9% of the portfolio today. Violin Memory where we've invested $14.8 million representing 5.7% of the portfolio. Dropbox, we've invested $13.7 million representing 5.6% of the portfolio. And Chegg where we've invested $14 million representing 5.5% of the portfolio.

You know, part of our strategy is to continue to build positions in core names of investments where we've taken a foothold and we continue to add. Some of the positions that we've added that we've already owned in the third quarter include Altego, AlwaysOn, Control 4, Dropbox, Gilt Groupe, Maven Research, and Twitter.

As a reminder, the five core investment themes that we focus on because we believe these are the greatest growth opportunities that will be found are Social Mobile, Cloud Computing and Services, Internet Commerce, Cleantech, and Education Technology. We believe that these themes participate the greatest in the mega trends that will drive the economy forward in the years to come and best represent the greatest potential for long-term value creation. Looking across our investments today, we have deployed approximately 24% of our funds into Social Mobile, 24% into Cloud Computing Big Data, 11% in Internet Commerce, 31% in Education Technology, and 10% in Cleantech.

Our strategy is to build a robust diversified portfolio of great dynamic companies. And I could tell you that the companies in our portfolio are doing exceptionally well. We are focused on maximizing the portfolio total return through proven and rigorous investment strategy we built up over the past two decades. Our 4P formula of identifying and investing in the best companies, people, product, potential, predictability, really are the cornerstone of our approach and has proved to be a very successful approach over time.

While clearly we're disappointed with the performance of the stocks that have gone public from our portfolio this far. It's important to remember that one, these companies represent a very small portion of our overall investment portfolio and it's still very early in the lifecycle of these public companies.

As the case of Facebook, while clearly they couldn’t have had a more of a debacle IPO, we continue to be very, very bullish on the long-term prospect for Facebook. We think once this lockup and some of these stock issues get behind us, you know, we think the company's stock is poised to do very, very well. And as I made the general point, just to make a reference about how big Facebook, Groupon, Zynga, you know, those three represent $16.5 million that we've invested while the top three positions that we have in our portfolio are approximately $70 million of investment. So in other words, we have approximately twice as much in Twitter alone as we do in Facebook, Groupon, and Zynga combined.

One reason that the current IPO market is relatively quiet is that in the Jobs Act there's a lot of companies to file quietly with the SEC. And while we can't comment on any of these quiet filings, there have been several stories in the media regarding the near-term IPO potential of several of our portfolio companies. And these same stories imply valuations of those companies well in excess of where we purchased and shares made our investment.

I'll also note that one of our companies, Silver Spring Networks, is on file with the SEC for an IPO. Moreover, we believe that all the companies that we have large positions in and are of any size and skill could go public if they so choose.

I know the stock buyback is also an issue that is on investor's minds. It's something that we focus on as well. And we think it’s - to be crystal clear, we believe that it's our job as management to optimize shareholder value and clearly with the NAV of $13.45 and where the stock is currently trading, there's a pretty significant discount that due to stock buyback certainly could be an appropriate strategy and we monitor this very, very carefully.

But while that's something that is on the front of both investors’ minds and our minds, it's our decision currently, meaning today, that we don’t believe it's in the best interest of investors to buy back shares today. And the reason for that is we're highly confident in the value creation potential of our portfolio. You know, we believe that our shareholders have bought into GSVC to optimize value and by doing that, the greatest way we're going to do that is buying great growth companies at attractive prices. And while we think those stock buybacks could be something that we would do and it's something that is on our front burner to continue to evaluate. One thing of it would be a negative impact, would decrease our flow, making it more difficult for institutional investors to participate in GSV.

I'll close my comments with two people that we've added to the team that we're very, very excited about. In the third quarter, Bill Campbell joined our board of directors. It's not an understatement to say that Bill is one of the most respected influential people in Silicon Valley. He's currently on the boards of Apple and Intuit. After serving a number of years as Intuit's President and CEO, again Bill is called the coach of the valley. And we think it's something that we're excited to have him be formally on the team. But it also adds just a tremendous amount of insight to us and help in our strong desire to execute against enormous opportunity that we have in front of us.

And then Dave Crowder also joined in the third quarter as Executive Vice President. Dave has been an advisory board member of GSVS at management since 2011 after a long career at Montgomery Securities and Thomas Weisel Ventures. He ran an internet group at internet group at Montgomery. He co-headed the Venture Capital Group and Thomas Weisel Ventures. And I have known Dave for 15 years and think he's one of the most talented professionals in the technology world.

Both Bill and Dave have already made strong contributions. And to have them on our team is clearly a competitive advantage for GSV.

In short, we continue to execute against our strategy in the third quarter. And we're very happy with the state of our portfolio. We are more confident in our strategy than ever. And we're focused on leveraging our network and our diligence process to identify and invest in what we believe will be the big winners in the years to come.

Thanks for your attention this morning. I will ask Steve to make some quick comments on financials and then open up the call for questions.

Stephen Bard – Chief Financial Officer

Thanks Michael. As of September 30th, the total value of our portfolio investments was $217.4 million. Net assets as of September 30th were $259.9 million, which includes cash and money markets, and translates to a net asset value per share of $13.45 through – for 9-30, which compares to net assets of $266.9 million or $13.81 per share as of June 30th, so the NAV has dropped $0.36 per share over the quarter.

During the quarter, we originated about $50 million in investments in nine new, and nine existing portfolio companies, and that figure excludes transaction costs.

Since inception, we’ve invested a total of approximately $224 million in 44 companies through September 30th.

Net investment loss for ongoing operating expenses for the third quarter was $2.3 million, which translates to $0.12 per share, and that compares to an NOL of about $2.1 million or $0.13 per share for the second quarter of 2012. We did not record any realized gains or losses in the third quarter, and we had a realized loss of $1.4 million or $0.08 per share in the second quarter of 2012, that was our Zynga PJV investment.

The net charge – I’m sorry, the net change in unrealized depreciation, which is comprised of transaction costs, finder’s fees, legal expenses, escrow fees, and most importantly any fair value adjustments was approximately $4.7 million or $0.24 per share for the third quarter. And that compares to about $2 million or $0.12 per share of unrealized appreciation for the second quarter of 2012.

That all results in a net decrease and net assets resulting from operations for the third quarter of about $7 million or $0.36 per share, and that compares with $5.5 million or $0.34 per share for the second quarter of 2012.

As Michael said, we ended the quarter with about $42.3 million in cash, and cash equivalence. That translates to about $2.19 per share.

With that said, I’ll now turn the call back over to the operator to start the Q&A session. Operator?

Question-and-Answer Session

Operator

Thank you, sir. We will now begin the question-and-answer session. As a reminder, if you have a question, please press the start followed by the one on your touchtone phone. To withdraw your question, press the star followed by the two. If you are using speaker equipment, you will need to lift the handset. We are also asking, when you queue up please ask one question only, and then reenter the queue for any follow-up questions.

Our first question comes from the line of Ed Woo – Ascendiant Capital. Please go ahead.

Ed Woo – Ascendiant Capital

Yes, good morning. I have a question in terms of your cash balance. Do you have a targeted cash level that you would like to be at? And when do you think you will be fully invested?

Michael Moe – Founder & Chief Executive Officer

Ed, I may let Steve provide a little bit more detail. The answer is yes we do have a target, and basically we look at kind of [inaudible] dynamic process that we use, but we essentially are making a calculation both of how much we ultimately want to get into a position, how much we might need to be able to have, as cash to put in following where we’ve made primary investments, you know where that’s going to be an expectation that we participate in future financing. How much we think is appropriate just to keep available for opportunities, and so forth. And so, the $42 million, you know – and there was also – while it’s $42 million of cash, we do have public securities where we have some liquidity, which we expect that we will monetize in the relatively near term.

So, as we look at that, you know we basically want to make sure that we don’t get down below $20 million with the current size portfolio to date, to make sure that we do have both the flexibility and the cash to participate as we should to remain good partners with some of these companies. And that’s a process that we are going to look at very regularly, also again make a calculation about the liquidity that we’re likely to have either with current positions that are public, or positions that we estimate will be public in the next six months. And then obviously we’ll (rack) with that.

Ed Woo – Ascendiant Capital

Great, thank you.

Operator

Thank you, and our next question comes from the line of Mohammad Sheikh – B Finance. Please go ahead.

Mohammad Sheikh – B Finance

Good morning Michael, how are you?

Michael Moe – Founder & Chief Executive Officer

Great. How are you?

Mohammad Sheikh – B Finance

Good, good. Michael, I have a question. Obviously we hear everything you have been doing, and obviously when you read it, it makes a lot of sense. Yet, during the past quarter the stock has repeatedly been making new 52 week lows. At what point do you think the bleeding stops? And one thing which is evident, is an issue when you invest in these companies, and when they do go public they initially do well. But by the time the [inaudible] expires, all [inaudible] case in point, you know, they’re the three you have which you’ve already gone public. Are you able to collar these positions to protect that? Because obviously, you know there [inaudible] public soon. But the question is, is when you actually go sell these things, will the value be higher at that point, and not at the initial IPO?

Michael Moe – Founder & Chief Executive Officer

Thanks for the question. First of all, I very much appreciate your involvement. I know you and your team have been very active with the company, which we appreciate your long-term support.

Secondly, as it relates to kind of what, you know, the strategy is as a company goes public one, we certainly if provided the opportunity for liquidity we’ll evaluate that at least for a part of the position, just to take some money off the table and to claim some victory.

We also think, you know, the key part of creating margin safety for our investments and for the portfolio is the price that we’re paying for the shares and what we think they’ll likely – what they’re likely to trade in the public offering, and clearly if we’re doing things right, and we don’t run into kind of unexpected issues like had with the Social Media Group overall. You know, it’s our expectation that, one we’re buying the shares at a nice discount to where the company’s price [inaudible] and an even better discount to where they trade six months after that. And it’s something that we will be trying to protect and monitor in an aggressive fashion.

I think we’re excited about some of the likely IPO’s that you’re going to see coming up. And again I don’t want to either jinx it, things can change, things can happen, but we feel very good about the valuations that we’ve paid, and where these companies are likely to trade. And we think that’s going to be a great – going back to the issue with the stock, we think that’s going to bump and be a great catalyst for stock, and give people some confidence that, when you look at the 40-plus investments that we’ve make. One, we’ve got great companies and we’ve candidly paid great prices for it.

And so, the answer in terms of what we’re able to do in terms of collar and so forth, we are – and Steve maybe you want to go through some of the technical pieces, but generally speaking that’s going to be prohibitive for us. With the Zynga investment we made, for example, which was a protected investment, we made because of the structure we could have done something in addition to the downside protection that we created. But generally speaking that’s going to be prohibitive. But Steve, anything to add to that?

Operator

The next question comes from the line of Darnell Elliot, a Private Investor. Please go ahead.

Darnell Elliot – Private Investor

Hello, Gentlemen. My name is Darnell. Can you all hear me okay?

Michael Moe – Founder, CEO

I can, Darnell.

Darnell Elliot – Private Investor

Great. The reason I ask, I’m calling all the way out from Afghanistan. I’m serving overseas.

Michael Moe – Founder, CEO

Oh my gosh, well, thank you so much for your service.

Darnell Elliot – Private Investor

Thank you. Thank you for the kind words, sir. You know, my typical day, you know, and I’ll try to keep this as short as possible, but my typical day, through the day, I dodge rockets, mortars and recall fragments. I smoke a carton a day. And at the – you know, in the evening, the stock market opens up in the evening, you know, I’m about 11 hours ahead of you over here and at the end of the day, you know, I look into my account, I’m holding 11,000 share of GSVC. I’m all cash, so I don’t have to worry about a more urgent squeeze, but I am worried about if, you know, brokers, for people that are holding the stock on margin, with it trading so low, I’m concerned that people are going to get squeezed out of the stock, that you know, brokers are going to create margin requirements if it continues to make new 52-week lows.

Needless to say, I’ve lost $60,000 in the stock, so not only am I getting shot at every day, but every single day it seems I’m losing thousands of dollars every single day every time I, you know, look at the market. I’m not going to, you know, eat your lunch over Facebook, Groupon and Zynga, hey, mistakes happen, you know, I make them all the time myself.

You know, as far as some of these other companies you’re investing in, I don’t have as much faith. I have a lot of faith in Violin Memory, I think they make a quality product and I think it’s well ran. So you do have some quality companies that I do believe in and you know, I’m not going to say I’ve given up faith in the stock, but a lot of things, you know, I get very discouraged. I looked up the technical on the technical guidelines myself and I have every technical indicator on every chart, every [inaudible], you name it, everything is telling me, sell this stock. And I’ve been ignoring my own principles holding onto this stock. So in as many or as few words as it takes, convince me to continue to hold onto 11,000 shares. I mean, I’m, you know, with – I mean, you said that you’re not willing to do a share buyback, you know, I’m concerned about the stock starting to trade at junk and if it starts, you know, if it gets around like 5 or 6 bucks, I mean, this stock is never coming back, let’s face it. You can convince me on why I should continue to hold onto 11,000 shares.

Michael Moe – Founder, CEO

Sure. Well, first of all, Darnell, again, we very much appreciate your service to this country and that is truly something that we all are very thankful for. Secondly, thank you for putting your trust in GSVC, that is something that means a lot to us and we have a number of shareholders that I hear from, not from Afghanistan, but we take – we understand the faith that you put in us and it’s our job to deliver value for you.

The thing I know, having been in the investment business for over 25 years now, is that ultimately the fundamentals drive stock price. And ultimately, the fundamentals drive the technical. And what I do know is from an investor’s standpoint, one of the things that I think is basically heaven on earth is when you’ve got a high-growth portfolio, high-growth fundamentals with business and you have a substantial discount to value because then you get what I call a double play. And so I don’t know, you know, what the magic is, nobody rings a bell and says, okay, all the sudden people are going to care, but as I look out over the next 6 to 12 months, you know, what I see is [inaudible], the stock, you know, flows a gap between a substantial discount and net asset value and where the stock is currently is there are a handful of investments that we’ve made that are very likely to go public or get bought and I think they’ll be in situations where we’re – where we have a good degree of confidence that they’ll be good confirmation strategy and I think that’s going to be a big callus for the stock.

As it relates to the buyback, I don’t want to say we’re unwilling, this is something – we had a – you know, we look at this every day and you know, certainly as the discount grows greater, if it grows greater, that’s a tool that we, you know, we’ll absolutely use if when we think it’s appropriate. We just – to date, we still think the best use of cash for us is not by retiring shares, but by investing in companies where we think we can make 3, 4, 5, 10 times our money and that’s what we’re focused on. And we – and we’re very, you know, we’ve very confident both in terms of what we’re seeing, our ability to be invested in the very best private companies in the world and we think that this strategy in the interim to long-term is going to play out extraordinarily well for investors. And so, I, you know, people have to do what they have to do but as it relates to us, you know, we’re as confident as we’ve ever been about what we’re doing and the value we’re going to create here and not just to any of you, but beyond. And you know, we’ll continue – we’ll put our money where our mouth is personally. So we will – you’ll continue to see us eat our own cooking as it relates to management buying stock.

So again ,thank you very much. We very much appreciate your call all the way from Afghanistan.

Operator

Thank you. Next up is Brett Rice with Janney Montgomery Scott. Please go ahead.

Brett Rice – Janney Montgomery Scott

Good morning, gentlemen.

Michael Moe – Founder, CEO

Good morning.

Brett Rice – Janney Montgomery Scott

You know, in the 1990s, before the Internet burst, there was a company safeguard scientific that would spin off or dividend out some of their winning equity investments to shareholders and the stock had a tremendous run in the mid-1990s. Is GSVC structured in such a way that you could do that type of strategy and is it something you would consider?

Stephen Bard - CFO

Brett, thanks for the question. This is Steve Bard.

Brett Rice – Janney Montgomery Scott

Go ahead, Steve.

Stephen Bard – CFO

Yes, we are structured that way as a business development company and the intention is to pay out at least 90% of our realized gains in the form of dividends. So you know…

Brett Rice – Janney Montgomery Scott

But as it relates to the safeguard, Pete Muster is somebody that I’ve got to know well and he’s a person that I admire. He obviously left Safeguard a while ago, but you know we certainly know Safeguard and Pete’s somebody that is one of the jewels of life.

You know, that might be a way to narrow the discount from the market price and NAV if you know, a year or two from now the market still doesn’t recognize the good things you’re doing.

Michael Moe – Founder, CEO

We will use every tool available to us to recognize – to create shareholder value and very much appreciate your comment and question. Thank you.

Brett Rice – Janney Montgomery Scott

Great. Thank you.

Operator

Thank you. Your final question is a follow-up from Mohammad Sheikh with B Finance. Please go ahead.

Mohammad Sheikh – B Finance

Hi, Michael. One question I had in reference to Violin Memory, I know that’s one we anticipate we do well, you [inaudible] they canceled that agreement with HP, do you see that as a detriment to the stock IPO?

Michael Moe – Founder, CEO

You know, there’s always a lot of, you know, high tech world is always full of deals and deals that get canceled and so forth. And they mysteriously seem to happen a lot when companies are rumored to be going public. We have a high degree of confidence in Violin and the growth that they’re experiencing is extreme, you know, it’s a great company with a great management team and a great product and things will happen. So no, I, you know, it’s not by – it’s not something that was completely unexpected and it doesn’t – I mean, the growth in the pipeline for Violin is something that we’re very encouraged by.

Stephen Bard – CFO

And I’ll just add to Michael’s comments, the press has certainly picked up on the fact that that agreement between Violin and HP is going away, but what does not typically get mentioned is the agreement was for a prior iteration, an earlier generation Violin product, the 3,000 series product and the company’s moving toward the new product, the 6,000 series. So while you never like to see agreements going away between Violin and major OEMs, you know, I think that’s a nuance that didn’t necessarily get picked up in the press and folks should appreciate it.

Mohammad Sheikh – B Finance

Good comment. Thank you.

Michael Moe – Founder, CEO

Thanks, Mohammad.

Operator

Thank you. And ladies and gentlemen, that concludes our conference for today. We thank you for your participation. You may now disconnect.

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